Goldman deal is a one-off, commercial realty is going down

India's commercial realty space, plagued by the slowdown and resulting overcapacity, has just got a major boost from a US banking group. According to a report in the Economic Times, Goldman Sachs has agreed to take on lease a 1.6 million square foot office space on Bangalore's Sarjapur outer ring road. This is the largest property deal in India in the leasing space, the second largest being IT firm Cisco for 700,000 square feet earlier this year, also in Bangalore.

The bank will pay a rent of Rs49 per square foot a month - about Rs 60 crore a year for a million square feet, the report said. Local property company, Kalyani Developers, will construct a three-building campus for the bank, which will initially lease one million square feet. Goldman will lease the remaining 600,000 square feet in a second phase. However, the deal appears to be a steal as the office space will only be ready in 2017, and taking inflation into account, Rs 49 per square foot is extremely cheap, industry experts told Firstpost.

In a market where companies are increasingly looking at cutting costs by consolidating their different offices within a city to single, large and cheaper locations, the Goldman Sachs deal sets a benchmark,Ravi Ahuja, Executive Director, Office Transactions, India Cushman & Wakefield told Firstpost. Given that the largest Indian commercial sales realty (Citigroup's Rs 985 cr office deal) was also closed recently in Bandra-Kurla Complex in Mumbai, there is an indication that although commercial realty is witnessing a slowdown in terms of occupancy, their commitment to grow their operations and businesses in India still remains, he explained . "As long as developers continue to provide quality spaces at the right prices/rentals and occupiers can see a favourable value proposition, such deals will be struck," said Ahuja.

 Goldman deal is a one-off, commercial realty is going down

There are some larger commercial space requirements floating in the market, but no deals have concluded so far. Reuters

Not, everyone agrees with this. Many feel the Goldman deal is just a one-off case and the commercial space is still suffering from innumerable problems like a halt in financing projects, RBI disallowing restructuring of loans, new FSI norms and a slowdown in the global economy. One property consultant who did not want to be named pointed out that Goldman Sachs is often known for funding the realty space, if the company is getting such a cheap deal it must be providing some form of finance restructuring to the developer.

"The Goldman Sachs deal has been in the pipleline for many years now, it does not mean the market is catching up. In fact Bangalore saw some pick up in the first quarter of this year and that too majority of demand in the first half of 2012 was spillover of work-in-progress deals from 2011, but the second quarter numbers are looking weak, Anuj Nagpal director, investment advisory, DTZ, an international property consultant told Firstpost. DTZ's head of research seems to agree. "The deal is a spill-over from 2011 and primarily a consolidation move to cut costs with a provision to accommodate future growth. Goldman Sachs had signed up this 25 acres of land last year in December. So this deal does not come as a surprise," he said.

Currently US companies contribute 48 percent of the total office space demand in India, followed by India (27 percent) and other European nations (14 percent), according to property consultantJones Lang LaSalle. However, demand from these US companies has been stagnant in the last couple of quarters. Over the last few months as companies have become more cautious and seem to be re-evaluating/deferring their expansion plans, said JP Morgan's real estate analyst Saurabh Kumar in a recent report. "Delivery timelines of number of ongoing projects have been pushed back due to tight funding environment," he had said.

In India, commercial realty is largely driven by IT-ITes companies. But given the current weak macro environment, most of the IT companies have posted negative or flattish growth in the fourth quarter. And this is likely to continue for at least another two quarters, depending on the situation in the US and Europe. " Most IT companies have cut their realty budgets till their clients abroad sign more deals, until demand picks up in the IT sector, demand in the real estate space will continue to be bleak," Pankaj Kapoor, managing director of property consulting firm Liasas Foras told Firstpost.

Moreover, all the big deals in the office space have already taken space. Most of the financial services firms and IT companies that had to consolidate operations under one large roof in India have done so when the going was going in the West "Standard Chartered, Enam, Kotak, Deutsche Bank, Citibank etc have all consolidated their ops, said Nagpal. Going forward it won't be the MNC but the local businesses that will drive demand. Hence not large volumes will be leased out but more smaller deals would take place.

In Mumbai too, despite the slowdown, leasing and buying activity at Bandra Kurla Complex continued to accelerate during the last two quarters. " Over the last 24 months, the market needle has begun to point towards a landlord-favouring market, said Ramesh Nair, Managing Director - West, Jones Lang LaSalle India in a note recently. And this change in sentiment can be attributed to large deals by Citibank, Deutsche and First Rand Bank as well as the lack of new quality supply in the market in 2013 and 2014, he said. However, now that there is a supply constraint, prices are sure to rise in the commercial space. Lack of reasonably priced options for IT/ITeS tenants is why Mumbai continued to register weak absorption trends in Q4.

Going forward, Kapoor says the commercial office space is only going to get from bad to worse as lease rentals have come down. There is ample inventory across India but no buyers, which is why buyers are now offering various discounts and financial incentives to lure corporates to lease large spaces. A Times of India report, recently pointed out that there are some larger commercial space requirements floating in the market, but no deals have concluded so far, Big corporates like Juniper Networks, Intel and Cyprus that are looking to occupy large spaces are yet to sign deals.

Updated Date: Dec 21, 2014 04:49:00 IST